SIPP Pension via Nucleus WRAP

alexprokop

I'm a contractor and operate via my own Limited Company. I've recently set up a pension (I believe it's a SIPP) via an IFA, who will invest on my behalf via the Nucleus wrap system. I got back an illustration of the value of the pension in future years and was shocked at what the total cost of the fees came to (figures assume 7% growth):

At retirement:
Total invested: £187,000
Deductions To Date: £72,200
Effect of Deductions: £129,000
Value: £339,000

The fees are quoted as Nucleus Fee 0.35%, Fund Managers Fee 0.34%, Advice Fee (to my IFA) 1.2%, making a total of 1.89% pa.
While this sounds small, the effect of compound interest is obviously massive! In fact it even says that the fees have the effect of bringing the growth down from 7% to 4.68%. Really at that level, what's the point? Other than the tax benefits I may as well just put my money in a high interest account.

I know pensions (and pension fees) are a hot topic at the moment, and now I can see why, I'm now kicking myself for not requesting an illustration before I signed up!

I guess I want to know whether this 1.89% fee is standard for this type of pension, or whether these values are outrageous? (they look that way to me!)

From my understanding, IFAs legally have to offer advice either by fee or by commission. Even though the documentation misleadingly labels these as fees, they are clearly commission (at least the IFA 1.2% part). Is it likely that I am able to renegotiate payment terms at this point?

I haven't actually invested any money yet and am considering cancelling. Should I expect any kind of cancellation charge?

Any advice would be massively appreciated!

dunstonh

The fees are quoted as Nucleus Fee 0.35%, Fund Managers Fee 0.34%, Advice Fee (to my IFA) 1.2%, making a total of 1.89% pa.

IFA charge is high. Most IFAs take 0.5% to 1% depending on fund value (the more you have the lower it will be)

While this sounds small, the effect of compound interest is obviously massive!

One problem. You have an illustration giving you future money terms but are looking at it as if it is todays money terms.

Really at that level, what's the point? Other than the tax benefits I may as well just put my money in a high interest account.

you do realise that the charges on your high interest account are likely to be higher? Plus, the high interest is likely to be lower than the investment returns.

I guess I want to know whether this 1.89% fee is standard for this type of pension, or whether these values are outrageous? (they look that way to me!)

You can get cheaper. The IFA has recommended a professional investment platform using low cost investments. His own charge is higher than you would expect but you dont mention the investment value you have at this moment.

From my understanding, IFAs legally have to offer advice either by fee or by commission. Even though the documentation misleadingly labels these as fees, they are clearly commission (at least the IFA 1.2% part). Is it likely that I am able to renegotiate payment terms at this point?

They are not commissions. Nucleaus is an unbundled platform. Commissions are rebated to you and you are charged fees explicitly. You can ask the adviser to renegotiate. How much is your year 1 investment so we can see how much 1.2% of that equates to?

I haven't actually invested any money yet and am considering cancelling.

Considering you are mixing up todays money terms and future money terms and considering an option that is worse than the recommendation, I suggest you do not do that. The concept is right. Maybe you are not suited to a professional investment service and maybe a simple/budget option is more within your investment knowledge and experience. Maybe this IFA is being greedy and a cheaper one down the road may be better for you. Maybe what you have is fine but you just dont understand it and need it explained more.

PaulCooper

For fear of being too simplistic, the 7% illustrative returns are exactly what they say ILLUSTRATIVE with the benefit of hindsight, you'd be very lucky to average 7%, then it'll get knocked down with fees.
If you want to be in control of your pension without risk and minimal fees, open up a SIPP, you'll get someone to administer it for <£1000pa, put the money in a high interest account earning 4%. That way you know exactly what the return is and exactly what the fees are.
Paul

dunstonh

For fear of being too simplistic, the 7% illustrative returns are exactly what they say ILLUSTRATIVE with the benefit of hindsight,

No they are not. They are 7% gross of charges. Nothing to do with hindsight. Just examples of 7% and not 7% net either. Investment returns themselves are normally quoted net of charges. Illustrations are gross.

If you want to be in control of your pension without risk and minimal fees, open up a SIPP, you'll get someone to administer it for <£1000pa, put the money in a high interest account earning 4%. That way you know exactly what the return is and exactly what the fees are.

That doesnt remove risk. It just changes the risks from one investment returns that may provide a shortfall and be subject to inflation risk to one that is guaranteed to provide a shortfall and be subject to inflation risk.

alexprokop

@dunstonh I appreciate that I don't currently know enough about it and that is why I'm posting here.

Apologies, my high interest account comment was facetious and I'm not really considering putting retirement money away like that.

I'm not starting out with a lump sum investment, but am planning to invest £650 / month. IFA's fee is 1.2%, but will only drop down to 1.1% after the fund reaches £300,000. There are further tiers after that but I think the next level is at £1,000,000, which I'm unlikely to reach!

alexprokop

@dunstonh From what you say, it does seem to me that the IFA's fee is high and perhaps I should consider cancelling and taking time to research the market and speak to more IFAs. As I currently have nothing invested in this fund, it shouldn't be a problem to cancel?

I am happy with the concept of this investment / platform, but was shocked at how much of the value of the pension was eaten up by what sounds like relatively small fees.

@PaulCooper Correct me if I'm wrong, but I believe this is a SIPP and that my IFA is managing for me. Only that the fee is not fixed but a percentage of the fund value.

Aegis

alexprokop wrote: »

I'm a contractor and operate via my own Limited Company. I've recently set up a pension (I believe it's a SIPP) via an IFA, who will invest on my behalf via the Nucleus wrap system. I got back an illustration of the value of the pension in future years and was shocked at what the total cost of the fees came to (figures assume 7% growth):

At retirement:
Total invested: £187,000
Deductions To Date: £72,200
Effect of Deductions: £129,000
Value: £339,000

The fees are quoted as Nucleus Fee 0.35%, Fund Managers Fee 0.34%, Advice Fee (to my IFA) 1.2%, making a total of 1.89% pa.
While this sounds small, the effect of compound interest is obviously massive! In fact it even says that the fees have the effect of bringing the growth down from 7% to 4.68%. Really at that level, what's the point? Other than the tax benefits I may as well just put my money in a high interest account.

I know pensions (and pension fees) are a hot topic at the moment, and now I can see why, I'm now kicking myself for not requesting an illustration before I signed up!

I guess I want to know whether this 1.89% fee is standard for this type of pension, or whether these values are outrageous? (they look that way to me!)

The Nucleus fee is fixed and represents reasonably value (though not always the best, especially as portfolio values grow into the multiple £100ks), so that's fine.

The fund charges are low, I'm assuming the IFA has selected a portfolio of passive investments to bring the fund TER down as low as possible.

However, the IFA's fee is, to me, unbelievably expensive. I did a double take recently when I heard that some IFAs are looking to increase their charges to 1% per annum, 1.2% is unjustifiable, in my view. My guess is that this IFA decided that his business model was essentially 2% TER on everything, and designed this portfolio to be a little under that level.

To put this fee into perspective, you would likely be able to source discretionary management (via a model portfolio) on a pension for under 1% (including VAT). That would mean a dedicated investment professional managing your account and making trades as appropriate. In all likelihood, an IFA won't have the time to dedicate to this, so typically you expect reviews once every 6 months or so.

I genuinely cannot fathom how this fee can possible be justified, and honestly think you should be aiming for a maximum adviser fee of 0.5%.

A drop to 1.1% at £300,000 is just baffling - that's still going to be over £3,000 a year just on your pension portfolio. It's a lot of money just for ongoing reviews!

From my understanding, IFAs legally have to offer advice either by fee or by commission. Even though the documentation misleadingly labels these as fees, they are clearly commission (at least the IFA 1.2% part). Is it likely that I am able to renegotiate payment terms at this point?

This bit isn't something you can legitimately complain about, as Nucleus only offer a fee-based payment system. All commissions are rebated to your cash account at present, and the adviser fee is completely independent of the investments selected. I should note that Nucleus have next to no say in what the adviser takes as a fee, so it's not that they are forcing the issue here.

I haven't actually invested any money yet and am considering cancelling. Should I expect any kind of cancellation charge?

Unlikely from what I know of Nucleus. That adviser may have put in a fee agreement even if you choose not to proceed, so check your documentation carefully.

Any advice would be massively appreciated!

Shop around. Even a Central London adviser can easily beat that fee.

Aegis

PaulCooper wrote: »

For fear of being too simplistic, the 7% illustrative returns are exactly what they say ILLUSTRATIVE with the benefit of hindsight, you'd be very lucky to average 7%, then it'll get knocked down with fees.
If you want to be in control of your pension without risk and minimal fees, open up a SIPP, you'll get someone to administer it for <£1000pa, put the money in a high interest account earning 4%. That way you know exactly what the return is and exactly what the fees are.
Paul

This is a very very poor investment strategy for someone many years away from retirement. Historically cash has barely beaten inflation and shows no sign of ever doing so.

Investments, on the other hand, have shown some fairly good returns for anyone who has been drip feeding into their portfolio for the last few years, and I have no doubt that a diversified portfolio will continue to generate good returns over the long run.

mania112

In summary then, we can say that your main problem is the IFA charges.

So you have 3 options:

1) Ask the IFA what he is doing for that money (and once he's explained it and you're not still not satisfied) ask him/her to reduce it, they may or may not agree - 0.5% - 1% is usually the acceptable margin.

2) Go direct to Nucleus and ask them to remove your IFA as servicing agents - this would be acceptable if you're happy, experienced and confident to manage your own investments.

3) Find an alternative adviser who will manage your plan for less.

jem16

mania112 wrote: »

2) Go direct to Nucleus and ask them to remove your IFA as servicing agents - this would be acceptable if you're happy, experienced and confident to manage your own investments.

As Nucleus is an IFA controlled platform, I can't see them agreeing to a no IFA relationship.

dunstonh

Whilst the IFA charge is high at 1.2% p.a. the problem is that you have a nil starting value. At the end of you will have about £8k in the pension. The IFA would have earned £93. So in monetary terms, the IFA is not being greedy. In percentage terms it appears greedy.

I can understand if he was taking 1% as that is more typical on sub £100k investments. The tier of charges down from 1.2 to 1.1 is farcical. The more typical model sees drops from 1% to 0.75% to 0.5% and way before 300k.

Whilst you have a good monthly contribution, it will be about 3 years before the fund value could benefit from ongoing servicing. So, you could argue that you need not pay anything to the IFA for ongoing servicing for the next 3 years and then factor it in at that point. Although that would see an initial advice charge come into play. It may end up being £500-£1000 up front but around 0.4% p.a.